Cybercurrency is intriguing premise, but has seen a flurry of recent devaluation

I've recently heard a couple of advertisements on satellite radio suggesting, of all things, that customers dive into bitcoins as a "stable" investment in the midst of the troubled U.S. economy. In the midst of a seemingly impending recession, some might be tempted to try such a scheme. Let's be perfectly clear -- while bitcoins are a worthy pursuit to dabble in, considering them as a place to put your nest egg is a pretty poor decision.

I. Bitcoins are in a Recession Themselves

After a meteoric rise to prices of up to $30 USD/bitcoin at their peak, the crypto-currency has plunged down to around $8 USD. This alone should be enough to convince any logical investor to stay away. But it's also important to consider the currency's strong current connection to the USD.

Over the last 30 days 82,099.28€ (Euros), $133,353.44 CAD (Canadian dollars), £119,336.29 (British pounds), and 607,234.53 PLN (Polish zloty) in Bitcoin have been traded on international exchanges. At current rates, that's approximately $659K USD in volume. By contrast, the top four USD-based exchanges managed $14.521M USD in trades, or roughly 22 times as much volume.

With approximately 95 percent of trades being in USD, the fortune of the USD intimately affects the fortune of the bitcoin.

When you combine the aspects that bitcoins are tied to the fate of the U.S. economy and that they've been on a downward plunge even sharper than the U.S. economy, the outlook is not pretty for bitcoins as a serious investment bid. Even amid the stock market's huge losses (with today's $300+ USD decline, the New York Stock Exchange is at its lowest level since December 2010), bitcoins are still not a solid alternative to guaranteed securities like treasury bonds, or a diverse portfolio.

II. Bitcoin Mining is in the Midst of a Correction

Another issue with bitcoin looms on the mining end. Bitcoin is trying to condense the natural creation of a non-commodity currency to just a couple decades, so it relies on initial seeding of wealth (similar to how people laid claim to natural resource stakes, which in turn gave rise to non-commodity wealth).

But the seeding is hitting a roadblock, as it's no longer advantageous to mine. With difficulty soaring, it's now impossible for most video cards to break even. The fastest graphics cards by Advanced Micro Devices, Inc. (AMD) still stand a chance to break even, but they require more than a year of work.

Meanwhile, the difficulty continues to rise at an unforgiving pace.

For those who already have money sunk into bitcoin hardware, they may keep mining for a time, but it may be unsurprising if they start to sell off their stockpiled hardware.

In the long term the market will thus correct itself as, in theory, computation gains will outpace the rate of mining. However, now is simply not a great time to enter the market as a miner.

III. The Big Picture

Returning to the original point, given the current climate bitcoins are not a much safer investment than stocks, as some purport them to be. They're actually much worse, at present.

Until these corrections fall into place, the currency is simply not a viable investment.

Fans of bitcoin may react negatively to this analysis, but it's hard to argue the hard facts. Bitcoin is a terrific concept, and one worth supporting. But when it comes to your money, an investment in bitcoins today, is essentially throwing away a chunk of your money, or perhaps breaking even in the case of mining (given hardware depreciation).

So as the U.S. faces a potential "double dip" recession, consider building a diverse portfolio of bonds, commodities, and stock from highly stable companies (GOOG, AAPL, IBM, etc.) as a way to guard your assets -- and avoid the bitcoins.

Comments

Threshold

Username

Password

remember me

This article is over a month old, voting and posting comments is disabled

quote: During the global financial crisis... Things here in Australia weren't to bad as we saw continued growth through the entire thing, so I really didn't pay much attention to it.

I think they are talking about the US in particular (though the principles apply everywhere). So I'm sure what you speak of is where Austrailia picked up what the US dropped. I don't know much about Austrailia, but the limited knowledge I do have indicates that you guys have better policies than the US. I can't imagine anybody being any worse than us. Nor could I imagine stupider people at the helm (and no I'm not just referring to Pres. Obama). I'm talking about maybe 95% of the population of DC.

"So, I think the same thing of the music industry. They can't say that they're losing money, you know what I'm saying. They just probably don't have the same surplus that they had." -- Wu-Tang Clan founder RZA